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DEEPYIELDTAX STRATEGIES

Inherited Farmland: Basis and Depreciation Questions, Answered

Short answer: When you inherit farmland, your starting basis is generally its fair market value on the date the owner died, not what they paid for it. There are three main exceptions: the estate elected alternate valuation, the estate elected special-use (farm) valuation, or part of the land was excluded as a qualified conservation easement. If the estate filed an estate tax return, the executor may have sent you a Schedule A (Form 8971) reporting the estate tax value. If that property increased the estate tax, your starting basis can't be higher than that value. Land itself is never depreciable. Farm buildings and other improvements are, starting when you place them in service. And inherited property is treated as held for more than one year, however long you've owned it.

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1. What is my basis in inherited farmland?

Publication 551 says the basis of property inherited from a decedent is generally one of the following:

  • Date-of-death value. The fair market value (FMV) of the property at the date of the individual's death.
  • Alternate valuation. The FMV on the alternate valuation date, if the personal representative for the estate chooses to use alternate valuation.
  • Special-use value. The value under the special-use valuation method for real property used in farming or a closely held business, if chosen for estate tax purposes.
  • Conservation easement. The decedent's adjusted basis in land, to the extent of the value excluded from the taxable estate as a qualified conservation easement.

This is the rule in Internal Revenue Code section 1014(a). It's why inherited land is often called "stepped-up" basis: the heir starts at the date-of-death value, not the decedent's old cost. If the land lost value, the same rule can step the basis down.

Publication 225 says that if Form 706 was filed, you can use its appraised value, and that if a federal estate tax return doesn't have to be filed, your basis is the appraised value at the date of death for state inheritance or transmission taxes. Publication 551 adds that if you didn't receive a Schedule A, your basis can be determined using that state appraised value. Not every estate has one. When there's no appraisal at all, many families get a written appraisal of the land as of the date of death (or the alternate valuation date, if the estate elected it), ideally with the land and each building or improvement valued separately. That's common practice, not something these IRS publications require. Your CPA can help you decide whether you need one.

2. What is alternate valuation?

Section 2032 lets the executor elect to value the whole estate at a later date. Property still held 6 months after death is valued 6 months after death. Property distributed, sold, exchanged or otherwise disposed of within those 6 months is valued on that date. The executor makes the election on the estate tax return, and once made it's irrevocable. The law allows it only if it lowers both the value of the gross estate and the combined estate and generation-skipping transfer tax. If the estate made this election, your basis is the alternate-date value, not the date-of-death value.

3. What if the estate used special-use valuation for the farm?

Publication 551 says that under certain conditions, the executor can choose to value qualified real property based on its use as a farm or in a closely held business, instead of its FMV. If the executor chooses this method for estate tax purposes, that value is the basis of the property for the heirs. Qualified heirs should be able to get the value from the executor or personal representative. Section 2032A caps how far this election can lower the value, at an inflation-adjusted amount set in the statute.

Special-use value can come with strings attached. Publication 551 says an additional estate tax is assessed if, within 10 years after the decedent's death (and, under section 2032A, before the qualified heir's own death), you transfer the property to someone who isn't a member of your family, or the property stops being used as a farm or in a closely held business. If that tax applies, you can elect to increase your basis to the FMV on the date of death (or the alternate valuation date). The election is irrevocable, you pay interest on the additional estate tax from 9 months after the death, and you file a statement with Form 706-A that identifies it as an election under section 1016(c). Publication 551 also says that if you received special-use property from an estate or trust, you increase your basis by any gain the estate or trust recognized because of post-death appreciation.

4. What is Schedule A (Form 8971), and do I have to use its number?

Publication 551 says that when an estate is required to file a federal estate tax return (Form 706), the beneficiaries generally will receive a Schedule A (Form 8971) from the executor. It reports the estate tax value of the property distributed to them. Certain beneficiaries are required to use that value as their initial basis.

The Form 8971 instructions say that if a beneficiary acquires property subject to the consistent basis requirement, the beneficiary cannot use a value higher than the value reported on the Schedule A as their initial basis. Under section 1014(f), that requirement applies only to property whose inclusion in the estate increased the estate tax. Publication 544 puts it this way: if your Schedule A indicates the property increased the estate tax liability, use a basis consistent with the final estate tax value, starting with the reported value and then making any allowed adjustments.

A few more points from the Form 8971 instructions:

  • Only an executor of an estate for which a Form 706 is filed after July 2015 is required to file Form 8971.
  • Form 8971 isn't required when the estate tax return is filed solely to elect portability of the deceased spousal unused exclusion amount, among other listed cases.
  • The executor must furnish each Schedule A no later than 30 days after the Form 706 was due (including extensions) or 30 days after it was filed, whichever is earlier.
  • Beneficiaries who report a basis inconsistent with the Schedule A may be liable for an accuracy-related penalty under section 6662.

If you got a Schedule A, keep it with your land records. If you didn't, the estate may not have been required to file Form 706, or Form 8971 may not have been required. Your basis then generally follows the rules in section 1.

5. My parents lived in Texas. Does community property change anything?

It can. Publication 551 and Publication 555 list nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Publication 551 says that when either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. Section 1014(b)(6) is the provision that extends this to the surviving spouse's half. For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. That matters if the surviving spouse later sells. And when the surviving spouse dies and the children inherit, their basis is generally set again under the rules in section 1. The rule applies only to property that was community property under state law, so whether the land was community or separate property is a question for your CPA or attorney. A few other states, including Alaska, South Dakota and Tennessee, have laws that let couples make a community property election. Publication 555 says it doesn't address the federal tax treatment of property under those elections, so don't assume the same result there without advice.

6. What if the land was held jointly?

Publication 551 covers two cases.

  • Other joint tenants. The survivor's basis is a blend. The share the survivor paid for keeps its cost basis. The share included in the decedent's estate takes its FMV at death. Publication 551's example then subtracts depreciation allowed before death on the survivor's interest. In that example, how the depreciation is split depends on each owner's share of the income under local law.
  • Married couples (qualified joint interest). For spouses who hold property as tenants by the entirety, or as joint tenants with right of survivorship when they're the only joint tenants, one-half of the value goes in the decedent's estate, no matter who paid. The surviving spouse's basis is the cost of their own half, reduced by depreciation and depletion allowed to them, plus their basis in the half they inherited.

Whether a deed created a joint tenancy with right of survivorship, a tenancy by the entirety, or community property is a state-law question, so confirm how the land was titled with your attorney or CPA.

7. Is there any case where I don't get date-of-death value?

Yes. Publication 551 says the rule doesn't apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent's death. Your basis is then the decedent's adjusted basis just before death. Property received from a trust can also follow different rules; Publication 551 covers grantor and non-grantor trusts separately.

8. Can I depreciate inherited farmland?

Not the land. Publication 946 says you cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up. Publication 225 adds that you can never depreciate the cost of land, and that the cost of land generally includes clearing, grading, planting and landscaping.

But much of a working farm isn't bare land. Farm buildings, grain bins, agricultural fences and drainage facilities are depreciable property. Publication 225's Table 7-1 lists recovery periods for farm buildings, agricultural fences, drainage facilities and grain bins, among others. Publication 946 says you begin to depreciate property when you place it in service for use in your trade or business or for the production of income, and that property you got as an inheritance has a basis other than cost (see Publication 551). So your depreciation runs on your own inherited basis, from the date you placed the property in service.

For more on which improvements are depreciable, see our page on depreciating farm land improvements (link below).

9. How do I split the inherited value between land and buildings?

You need a separate basis for the land and for each depreciable improvement. Publication 551's land-and-buildings rule is written for a lump-sum purchase: allocate the basis among the land and the buildings so you can figure the depreciation on the buildings. You multiply the total by a fraction: the FMV of that asset over the FMV of the whole property. If you're not certain of the FMVs, you can allocate based on their assessed values for real estate tax purposes. For inherited land, the starting total is the inherited basis, not a price. An appraisal that values the land and each improvement separately gives your CPA a clean split. Our page on farmland purchase price allocation walks through the same land-versus-improvements question for buyers.

10. Is inherited land a long-term or short-term asset?

Long-term. Publication 544 says if you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. Section 1223(9) of the Code says the same. Publication 225 adds one farm-specific limit: this rule does not apply to livestock used in a farm business. Livestock has its own holding period rules.

11. What if nobody ever depreciated the buildings I inherited?

It's worth checking. Publication 946 says that if you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. So unclaimed depreciation doesn't wait for you. It still comes off your basis. Publication 946 describes two ways to correct it: an amended return in some cases, and Form 3115 to change your accounting method in others. Which one fits depends on the facts, including whether the same treatment was used on two or more returns in a row. Our page on missed depreciation covers the choice.

12. What to gather

  • The date of death and the death certificate.
  • Any appraisal of the land as of the date of death (or the alternate valuation date), ideally with land and each building or improvement valued separately.
  • Form 706, if one was filed, including any special-use or alternate valuation election.
  • Any Schedule A (Form 8971) you received, and any supplemental Schedule A.
  • How the land was titled: community property, separate property, joint tenancy, or a trust.
  • The date you started using each building or improvement in your farm, ranch or rental activity, and your tax returns since then.
  • Any later improvements you paid for (these add to basis, separate from the inherited value).

Where DeepYield fits

DeepYield is a second set of eyes, not a replacement for your CPA. A free two-year look-back is a review of your last two years of tax returns, done for you, then a 30-minute call to walk through what we found. For inherited farmland, that means checking whether the inherited basis was split between land and improvements, and whether buildings, fences, bins and drainage you put in service are on a depreciation schedule at all. We go looking for what's missing, and we share what we see with you and your CPA. Sometimes the review ends with nothing to change.

Related: Farmland Purchase Price Allocation · Depreciating Farm Land Improvements · Missed Depreciation: Amended Return or Form 3115? · Selling Farmland to a Farmer: The Section 1062 Election to Pay the Tax in Installments

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Frequently asked questions

What is the basis of inherited farmland?

Generally its fair market value on the date of the owner's death. Publication 551 lists the exceptions: the FMV on the alternate valuation date if the estate elected it, the special-use value if the estate elected farm-use valuation, and the decedent's adjusted basis for land excluded as a qualified conservation easement.

Do heirs get a stepped-up basis on farmland?

Generally yes. Under section 1014, an heir's basis is the date-of-death value, not the decedent's original cost. If the land is worth less than the decedent paid, the same rule steps the basis down.

If the estate used special-use valuation, what is my basis?

Publication 551 says that if the executor chose special-use valuation for estate tax purposes, that value is the basis of the property for the heirs. If the additional estate tax later applies, you can make an irrevocable election under section 1016(c) to increase your basis to the date-of-death or alternate-date FMV, paying interest on that tax.

Do I have to use the value on Schedule A (Form 8971)?

If the property increased the estate tax, yes. The Form 8971 instructions say a beneficiary cannot use a value higher than the Schedule A value as the initial basis for property subject to the consistent basis requirement. Reporting an inconsistent basis can bring an accuracy-related penalty.

Can I depreciate inherited farmland?

Not the land itself. Publication 946 says land does not wear out, become obsolete, or get used up. Farm buildings and improvements such as agricultural fences, grain bins and drainage facilities are depreciable, starting when you place them in service, based on your share of the inherited basis.

Does community property affect the basis of inherited land in Texas?

It can. Publication 551 lists Texas as a community property state and says that when either spouse dies, the total value of the community property, including the surviving spouse's half, generally becomes the basis of the entire property, if at least half of it is includible in the decedent's gross estate. It applies only to property that was community property under state law.

Is inherited farmland a long-term asset?

Yes. Publication 544 says inherited property is considered held longer than 1 year, regardless of how long you actually held it. Publication 225 notes the rule doesn't apply to livestock used in a farm business.

Sources

Results depend on your specific facts. No outcome is guaranteed. This is general information, not tax advice; advice is provided only under a signed engagement.

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